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The intellectual and political debate surrounding the privatisation of public sector enterprises (PSE) has long been based on the abundance of bias and the scarcity of fact.
Last week, this column flagged how the famed October 1998 study by the Asian Development Bank (ADB) had long been cited by critics to showcase that privatisation between 1991-1996 was either a failure or didn't achieve the desired results - and therefore build a case against the privatisation programme.
Yet the ADB itself recently cited the same study to showcase that privatisation of the said era as a success and thereby build a case for its $20 million loan for PSE reforms and their privatisation. (See: Was 90s privatisation programme a failure? Published on Feb 2, 2015)
Titled Impact Analysis of the Privatization in Pakistan, that 98-study was left unpublished by the ADB. But while we were still waiting for ADBs head office to respond to our disclosure request for the purpose of clarity and transparency, a certain BR Genie emailed that report to our inbox. The summary of the findings below will hopefully settle the debate on whether 90s privatisation was a success or a failure.
For the most part, most of the critics got the data correct, or nearly correct A third of privatised entities had performed better after privatisation, about 29 percent performed worse after the transaction and the performance of the rest remained the same.
Yet that study starts off by saying that Pakistan's privatisation programme has been a success. It added that the programme achieved most of the objectives, namely: better state finances, widening of capital ownership and protecting employee interests.
The question is why the report terms the programme "a success", when only 32 percent of the firms were performing better after the transaction. The answer lies in what this column highlighted in the follow up piece on the subject last week. In Gaining buy-in for privatisation (Published Feb 3, 2015) this column argued that the context of the post-privatisation performance has to be kept in mind while evaluating the success or failure of privatisation.
As the ADB study cites, there were a host of industry specific problems. For instance, in the ghee sector over capacity caused the majority of privatised ghee firms to shut down operations or otherwise run losses.
The rice sector saw a fall in global rice prices immediately after the wave of privatisation leaving Pakistani players little room to compete. By the time the market recovered some major rice importers had built their own mills. Similarly, in the cement sector Zeal Pak Cement closed its operations as the sector had become too competitive and its plant was inefficient to operate.
Then the overall collapse of agriculture and manufacturing sectors and lower growth in service sector after 1992 had a major impact on the performance of privatised companies.
After a 7.7 percent GDP growth in 1992, the economy tanked to a growth of 2.3 percent in 1993. And it took time before the economy recovered to a growth of 6.6 percent in 1996 followed by an immediate slump again to 1.7 percent in 1997.
According to annual Economic Survey, average overall GDP growth in the 90s stood at 4.6 percent against an average of 6.5 in the 80s. Average manufacturing sector growth fell to 4.8 percent in the 90s from 8.2 percent in the 80s and 5.5 in 70s.
Of course, in analyses like these there is always a problem to separate the impact of privatisation from other changes in the market. But think of it this way. Had these firms not been privatised then the cost of economic slowdown to these PSEs would have been borne by the government. And with fiscal deficit already running at an average of 6.9 percent in the 90s (down from average 7.1% in the 80s), according to Economic Survey, there was little room for the government to bear that cost.
Aside from these macro and industry specific factors, another reason behind worse performance or businesses closures was that the method of privatisation was wrong. The ADB report says that in many cases firms were sold to the highest bidder without evaluating technical and financial competence.
This concern was also raised in these columns last week coverage, but it does not form an argument against privatisation per se. It only makes the case that transactions should be transparent and managed professionally.
With these findings, this article should settle the debate on the interpretation of the famed 98-study, and therefore pulls out one of the biggest fangs from the anti-privatisation argument. But be that as it may, a detailed study of all the subsequent privatisation transactions should still be conducted by relevant stakeholders to help give the right policy directions.
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Post privatization evaluation of PSE privatized between 1991-1996
=================================================================Better Same Worse Total
=================================================================
Public manufacturing companies 9 13 16 38
Misc. 3 10 1 14
Ghee mills 2 12 5 19
Rice mills 2 - 6 8
Roti plants 12 - - 12
Banks 2 2 - 4
Total 30 37 28 95
=================================================================32% 39% 29% 100%
=================================================================

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